Readers' comments

Monetary Central Planning is the root cause of all economic crisis. Western societies have a system in fact very similar to the Gosplan of the extinct U.S.S.R.
A complete invention (paper money) printed by a very small group of people is actually a scarse resource... in God we trust!!!!!
One can see the mechanism much better in the boundaries of the Western Civilization, such native people of Canada. It is crystal clear the purpose of the system and how is implanted to native people that never ask for it or need it.
Here two interesting links:
-Monetary Central Planning: http://www.world-depression.info/
-Kevin Annett, money system to slave native people in Canada: http://youtu.be/8do5BVTkYfI

Friedman’s explanation was driven not only by his fascination with money, but with his desire to refute Keynesian policy. In my opinion, he didn’t get the story exactly right, and the story he is famous for might not be what evolved into his story today.

His explanation of the cause of the Great Depression (very short version) was that the Fed blew it because they should have implemented policies that stopped the money supply from crashing.

If you look at data from then and now, he will notice that the monetary base was actually rising during the early days of the recession, but M2 crashed anyway. This weird situation means that Friedman isn’t exactly right about how effective the Fed could have been. They flat out would have had to print money, right?

Friedman said more than “they should have increased the money supply”. He said that the role of the Fed was to act as the “lender of last resort” so that the big banks wouldn’t have folded and the domino effect wouldn’t have started. He wasn’t arguing that they Fed should have increased the money supply but that they should have stopped it (M2 I think) from crashing in the first place. But here is where writing a causality story of recessions becomes tricky. Friedman did not say much about the interdependence of world economies. The world economy was already seeing deflation; the recession was exported to us.
Friedman’s got a paradox to contend with. The original source of the problem was that other countries were already seeing disaster and people were switching to wanting to hold gold. When US banks started to close, it increased gold demand EVEN more, but not enough to cause the depression in the United States. That is, rapidly decreasing liquidity is an EFFECT of the worldwide recession, not the cause.
The best take away from Friedman’s ideology is that even at the nasty zero lower bound the Fed could have acted differently. The empirical macro analysis undoubtedly can easily observe seemingly causal relationships but often another chapter (world economic climate) is easily omitted.

any down turn which can be revived with fiscal or monetary stimulus in short span of time is called recession. the quantitative easing and budgetary expansion in this case is good for reviving the economy. but along with it if debt is already too high the recession can take the form form of double dip

"a recession occurs when the monetary authority is confused into thinking that monetary policy is looser than it actually is." You have to be kidding! The cause of the 1929 crash and the busting of the housing bubble in 2008 is due to the exact opposite. Fear the Boom, not the bust! The quantity theory you see in textbooks is the "simplified" Cambridge equation, a pure Keynesian creation. You are surely familiar with the M*V= P*Y. According to this version, the money supply is related to real income and the price deflator or its proxy the CPI. So the implicit inflation target the fed has been following is the level of the CPI. The original quantity theory of money, related money to anything money can buy, and prices are on ....anything money can buy. So the Fed by looking at the CPI was looking at a tree while the forest around it was burning. Prices for consumer goods were stable, but housing prices were shooting up 20% a year. That should have been a screaming sign that monetary policy was too loose!!!!! They were simply defining inflation incorrectly. In the original quantity theory P is price of everything. We are probably doing the same thing today! Have you noticed that the S&P has gone up over 20% a year for the last 4 years.

Recession occurs when the monetary demand for production falls short of the quantity of potential production valued at prices that firms will produce it. Recession is only and always the result of a deficient circulation of money (The Trouble with Money).

The author seems to present a false dichotomy between accepting current mainstream theories and holding no theory whatsoever. While it may be best not to reject an established theory for one off, "this time is different" explanations, if another theory can better explain both the historical data and the current environment, it should be seriously considered.

It seems to me that the bifurcation of recovery rates--and their apparent elongation over time--is better explained by the debt-to-income paradigm than either the 1) Wicksellian natural rate paradigm embraced by the Neo-Monetarists and RBCT proponants or the 2) liquidity preference paradigm embraced by the New Keynesians. If one abandons the flawed loanable funds model of the financial system for a model in which credit is supplied elastically at the prevailing interest rate, and in which credit expansion is not zero sum in regard to purchasing power, then the answer seems pretty clear. The expansion in private credit as compared to private income since the 1980's has steadily reduced the effectiveness of the monetary transmission mechanism as marginal demand for credit declined in line with higher debt-to-income ratios (and other factors).

In such a regime, the zero bound does indeed pose a problem, but for different reasons than are proposed by the loanable funds schools of thought. More importantly, the difficulty of overcoming such a constraint is much greater than the proponents of those schools suggest. If risk-free interest rates are not, in fact, tools to balance real savings and real investment; and if supply of credit is not, in fact, constrained by the supply of loanable funds but is instead perfectly elastic; and if demand for private credit has, in fact, become decreasingly sensitive to price and increasingly sensitive to liquidity, equity, income, or other factors as debt-to-income ratios climbed; then traditional monetary solutions become increasingly inept, especially at the zero bound. In such a regime, monetary expansion becomes nearly impossible without help from the fiscal side.

I have yet to hear a convincing argument about how a lone central bank can generate inflation at the zero bound (and thus reduce real interest rates and debt burdens) if the channel of private credit demand does not function. Of course, the current mainstream theories do not even allow for the posibility of such a break in the demand function. Thus the post hoc answer is always that the central bank was merely insufficiently easy in its policy stance, regardless of how aggressive the policy was deemed at its inception. If current theories are both insufficiently explanatory and insufficiently predictive as compared to a competing theory, then it is time to put them to rest. Not to become lost in an empirical wilderness, but to finally advance in understanding.

We know no new technology or stuff exists that will create any more jobs.What i need comes from china. Money has been hoarded by bankers and elite through feds and stock exchanges.
Technology is at it's best and it's peak and has delivered humanity the best it could through jobs.
This is a unique recession and is called the ''mother of all kinds of recessions''.

It's about damn time for economists to realize the importance in the role of debt and the credit cycle. There are business cycles and there is a longer wave debt cycle. The business cycles happen every 5-10 years and are relatively mild. The debt cycles represent a large buildup of debt across a period of usually 50 years or so. Hedge fund managers realize it (like Ray Dalio); it's time for economists to wake up.

Over time, debt/income ratios keep rising until they can rise no longer. Then, the debt/income ratios have to correct; which usually means an extended period of stagflation as the debts get wiped out. Credit play an extremely important role in the economy. Hyman Minsky understood this; it's time for Robert Lucas to understand the same thing.

It's this simple, there are two ways of an economy to spend/invest--from income or from debt. The money can be spent on either goods and services or financial assets. Therefore, aggregate demand needs to be defined differently.

A healthy financial system is important for economic growth and well being, matching savers with those who want to invest and providing options for future income. Are there proposals to end too-big-to-fail policy, encouraging competition and credit availability? Is regulation focused on safety alone or a balance between growth and safety?

If your explanation of recessions relies on any kind of shock, financial or otherwise, then you don’t have a theory. A shock is something unexpected; it’s unexpected because no one has enough economic knowledge or foresight to predict it. Therefore shocks are random events, or black swans.

So claiming that shocks cause recessions is no different from saying @#$% happens! No wonder so many people are developing allergic reactions to anything called economics.

Different or not, and regardless of causes, the series of global recessions are over. Where is the world now?

Facing a massive adventure in competitions and population growth. That is very different and the world has changed.

Economic distress today is the progressive result of the 1997 Nobel for risk free financial pip squeezing and its imbalances. Current economuc woes are rooted in the theories of hedged insurance and its consequences. None of thus matters unless someone solves financing the next leap in world population and its travels. People breed and live longer, seven billion will be fourteen billion, regarless of scientific study and in your lifetime.

[Based on these images, one might easily conclude that there are in fact two kinds of recessions: those before 1990 and those after.]

And I think that there's something to that, actually. There will always be interesting idiosyncracies associated with a given business cycle. But there is enough similarity between downturns, across eras, that it seems reasonable to assign to them a common cause. I'd venture that, to a first approximation, a recession occurs when the monetary authority is confused into thinking that monetary policy is looser than it actually is. [Based on these images, one might very easily conclude that there are indeed two kinds of recession: those that occurred before 1990 and those that occurred after.]

Perhaps I'm misreading the graphs, but it strikes me that recent recoveries happen more slowly than older recoveries. Could this be related to demographic changes? If so, what do future demographics hold?

Smart post, but I think that's a little like saying "All deaths are caused by cardiac failure" which is similarly true. You probably will find at or near the start of every recession below-trend growth in the monetary supply but I don't think that's always because of policy errors.

When there's a real shock or a financial crisis the velocity is bound to slow, shrinking the money supply, as people get suddenly more eager to earn or sell and less comfortable relaxing or buying.

I don't think there are any policy tools that can work fast enough and smart enough to stabilize consumer sentiment. Individuals in aggregate can react in a second to bad enough news while monetary policy can only signal weakly. I don't think there's any value to macroeconomists adopting a paradigm for which there isn't a policy answer. The closest I can imagine would be "start inflating about three months before something unforeseen happens."

There are two kinds of downturns. Those that break consumer and business confidence, and those that do not. The latter can be addressed with monetary policy alone. The former have, because of prolonged irresponsibility in accumulating debt, reached the point that monetary policy alone will not work, and fiscal policy in the form of direct government spending is required. The Great Depression and, since then, the current unpleasantness, are the only examples of this type.